Friday, March 16, 2012

Today's Reports on Inflation, Inflation Expectations

Highlights from today's reports on inflation:

1. The BLS reported an annual inflation rate of 2.9% through February, matching the rate from January.  The annual core inflation rate was 2.2%, slightly lower than the 2.3% rate in January.

2. Gasoline prices rose by 6% for the month of February and by 12.6% over the last year.  Partly offsetting those increases were decreases in natural gas prices: -3.4% for the month, and -9.8% for the last year. 

3. The Cleveland Fed's median CPI inflation increased by 2.3% over the year, down slightly from 2.4% in January.

4. The Cleveland Fed also reported that its latest estimate of 10-year expected inflation is 1.38%, up just slightly from 1.34% last month (see chart above).  The Cleveland Fed provides monthly estimates of expected inflation over time horizons from 1 to 30 years, see its methodology here.  Over the next year, inflation expectations are 1.2% and over the next 30 years only 1.95%.

Bottom Line: Except for gasoline prices, there don't appear to be any widespread inflationary pressures building in the economy, and expectations of future inflation according to the Cleveland Fed's model are falling.


38 Comments:

At 3/16/2012 2:00 PM, Blogger The High Priest said...

This comment has been removed by the author.

 
At 3/16/2012 2:01 PM, Blogger The High Priest said...

-- Insert annoying comment about "Chicken Inflation Littles" --

 
At 3/16/2012 2:03 PM, Blogger morganovich said...

that cleveland tips spread model is of very dubious predictive abilty.

first off, it's been 50% low for the last couple years.

second, tips are pegged to CPI. few looking for inflation protection view them as useful as that tends to be the crowd who, like me, feel that CPI deeply understates inflation.

for a nice example, take a look at the recent weightings. home prices get 4X the weighting of rent, yet it's really a 3:2 ratio. healthcare is 8%, but 16% of the economy.

just weighting those 2 properly would add a full point to cpi.

the post boskin CPI is not an inflation measure anymore.

 
At 3/16/2012 2:36 PM, Blogger PeakTrader said...

Most Americans live month-to-month. There's almost no inflation on monthly expenses, except for gasoline prices, although that's partially offset by natural gas prices.

The Fed has been facilitating growth in the macroeconomy, while attempting to fully offset the many negative forces. If it weren't for the Fed, income and employment would be even lower.

 
At 3/16/2012 2:59 PM, Blogger Paul said...

Morganovich,


Do you have any thoughts about the Everyday Price Index?

 
At 3/16/2012 3:14 PM, Blogger morganovich said...

paul-

i had not seen it before, but it looks well structured to me.

it tries to weight items to actually mirror consumption and ignores all this subjective quality adjustment that has made CPI so deeply assumption based.

peak-

there is a great deal of inflation in month to month. food is soaring. food at home is up 4.5% even after the BLS adjustments. rent is soaring. so is healthcare. so is apparel.

i suggest you look at the release. you seem to have missed some key data here.

http://www.bls.gov/news.release/cpi.nr0.htm

the only thing that saved this number was the huge drop in utilities due to an extremely warm winter comped vs the very cold one last year. wait till air conditioning season kicks off in conjunction with driving season.

wanna bet cpi is well up from here by summer?

 
At 3/16/2012 3:40 PM, Blogger PeakTrader said...

Morganovich says: "there is a great deal of inflation... you seem to have missed some key data ."

Unlike you, I look at all the data. From your link:

"Over the last 12 months,
the all items index increased 2.9 percent before seasonal adjustment."

Of course, when prices rise, people buy less or substitute, and when prices fall, people buy more, and stock-up.

That's one reason why my inflation rate has been roughly zero for years, while my standard of living is way up, including from higher income.

 
At 3/16/2012 3:50 PM, Blogger morganovich said...

also worth considering on tips:

the more desperate people are to buy them, the tighter the spread to bonds.

the fact that they are off by so little may be a result of desperate, non price sensitive buying the same way t-bill yields got driven to negative numbers in recent panics.

using them as an "inflation expectation" proxy is a deeply flawed idea, especially now.

 
At 3/16/2012 3:57 PM, Blogger morganovich said...

peak-

clearly you did not look at all the data.

you are the one making the claim that month to month expenses apart from energy are not up.

look at the sub headings.

food at home: up 4.5%

perhaps you eat less than one a month, but i doubt it. that is the most monthly of expenses and the highest inflation ex energy.

health care up 3.4% and that's deeply understated. my health insurance is up 20% from a year ago and i am perfectly healthy.

that too is a monthly bill.

apparel: up 4.2 %.

so sorry, but your call about month to month costs only being impacted by energy is just totally unsupportable when food is the next biggest gainer.

the shelter number is deeply understated because it uses a 4:1 ratio for owners to renters when the real ratio is 3:2.

major urban areas are seeing double digit rent inflation.

if you weight healthcare and rent appropriately (hc is 8% of cpi vs 16% of gdp) CPI reads a full point higher.

absent the nearly 10% drop in utilities from a warm winter, and you'd be up maybe another 30bp.

 
At 3/16/2012 4:05 PM, Blogger João Marcus said...

The "logo is melting"!
http://thefaintofheart.wordpress.com/2012/03/16/inflation-expectations-loosing-traction/

 
At 3/16/2012 4:07 PM, Blogger morganovich said...

peak-

i also suggest you do 2 things:

1. read the actual boskin report. there is literally ZERO empirical support for the changes to cpi. it is all supposition, much of it dead wrong. the whole substitution idea assumes that all price change is supply based. that is CLEARLY not true. after the movie sideways, pinot noir sales spiked and merlot dropped. pino prices jumped and melo dropped. so what, you overweight merlot? no. the reason it's down is less demand. that is what drives most price moves in the us, not supply constraints. thus, the BLS methodology usually gives you weighting withe the wrong sign.

2. look at the index paul linked to. that's an inflation measure. it seeks to mirror actual consumption and cuts out all the subjective nonsense.

pointing to CPI as a sign of low inflation is simply not real evidence. we took their methodology and used it on a basket of goods. there were 100 goods of price 1. we moved the prices randomly by up to 5% but with zero net change. retain the new numbers, and iterate again. do it 10 times and basket of constant prices shows significant deflation in 10 of 10 runs of the model.

their equation makes anything look like low inflation.

it's a totally cooked number. you can link to all their apologist explanations on their site, but the fact is they lie.

what possible reason is there for helathcare and rents to have 1/2 the weighting they should?

do you beleive their was high inflation in the 70's?

because the current price action is the same as 1976. it's just that we fiddled the CPI to cut social security COLA.

either inflation is 8% now or it was 3% in 1976. there is no consistent way to claim it was high then and low now.

iphones and dvd players are just not enough of the consumption basket to matter.

 
At 3/16/2012 4:09 PM, Blogger PeakTrader said...

Morganovich, you continue to pound that square peg into round holes.

You need to ask yourself why investors and workers demanded higher rates and wages in the 1970s?

 
At 3/16/2012 6:16 PM, Blogger juandos said...

Well apparently pseudo benny has changed his moniker to high priest...

"There's almost no inflation on monthly expenses, except for gasoline prices, although that's partially offset by natural gas prices"...

Seriously you jest PT, the downward price of natural gas might possibly off set the price of a gallon of gasoling a penny or two over the period of a month...

"That's one reason why my inflation rate has been roughly zero for years, while my standard of living is way up, including from higher income"...

Serious question here PT is your 'actual' purchasing power up also?

"You need to ask yourself why investors and workers demanded higher rates and wages in the 1970s?"...

The screwy domestic policies of Nixon and Carter would be my first guess...

 
At 3/16/2012 11:44 PM, Blogger juandos said...

"The BLS reported an annual inflation rate of 2.9% through February, matching the rate from January. The annual core inflation rate was 2.2%, slightly lower than the 2.3% rate in January"...

Really?!?!

Isn't it about time to chuck the CPI out for something a bit more realistic?

 
At 3/17/2012 3:17 AM, Blogger PeakTrader said...

Juandos says "is your 'actual' purchasing power up also?"

Monthly expenses for housing, food, clothing, transportation, insurance (including medical-dental premiums and co-payments), etc. are roughly the same, except gasoline.

For example, when the cans of albacore tuna go on sale, e.g. from $2 to $1, I increase my purchases from zero cans to 10 or 20 cans (and do the same thing when they go on sale again in a few weeks or months).

I bought five nice shirts recently that were not only inexpensive, but also 30% off.

 
At 3/17/2012 9:21 AM, Blogger VangelV said...

1. The BLS reported an annual inflation rate of 2.9% through February, matching the rate from January. The annual core inflation rate was 2.2%, slightly lower than the 2.3% rate in January.

Only 2.9%? If the BLS used the same method that was used in the 1970s it would be reporting inflation that is HIGHER than the level that triggered Nixon's idiotic price controls.

2. Gasoline prices rose by 6% for the month of February and by 12.6% over the last year. Partly offsetting those increases were decreases in natural gas prices: -3.4% for the month, and -9.8% for the last year.

But we have seen the shale gas drillers announce a reduction in drilling activity. While prices should stay low through the summer we should be looking at a spike if there is a cold winter next year unless real economic activity continues to decline as it has been.

4. The Cleveland Fed also reported that its latest estimate of 10-year expected inflation is 1.38%, up just slightly from 1.34% last month (see chart above). The Cleveland Fed provides monthly estimates of expected inflation over time horizons from 1 to 30 years, see its methodology here. Over the next year, inflation expectations are 1.2% and over the next 30 years only 1.95%.

The Fed could not see the housing bubble even as it was bursting. If it is that incompetent why should we trust its future expectation reports?

Bottom Line: Except for gasoline prices, there doesn't appear to be any widespread inflationary pressures building in the economy, and expectations of future inflation according to the Cleveland Fed's model are falling.

Others disagree. Of course, they look at the data rather than the BLS reports so the difference in conclusions is to be expected.

 
At 3/17/2012 9:29 AM, Blogger VangelV said...

Morganovich, you continue to pound that square peg into round holes.

Not at all. He is simply looking at the NEW methodology and is pointing out that if you use it you will underestimate inflation. Applying it to the data from the 1970s that was used to justify price controls gives you a similar reading to the numbers that are being reported today.

 
At 3/17/2012 11:00 AM, Blogger morganovich said...

peak-

and you continue to offer no evidence for your positions and demonstrate a lack of understanding of what inflation is.

i note you are silent on 4.5% food inflation, even using the absurd BLS math. you resort to silly baseless rejoinders because you are unable to speak substantively to the topic.

what do wages have to do with anything? that's buying power, not inflation.

a world in which prices and wages both go up 1% is VERY different from one in which they both go up 10%. sure, as a worker, you have the same buying power, but your savings will certainly see the difference. borrowers and creditors will sure feel the difference. so will those on fixed incomes.

the fact that you cannot seem to understand the difference between wage buying power and inflation is precisely the reason you consistently come up with the wrong answers on this issue.

let's take a very simple example.

you earn $100k. you have $1 million in savings.

prices rise 10%. you wages rise 15%. thus, you buying power is up on a wage/price ration.

but you still lost big.

the value of your savings dropped by 100k in real terms, almost more than you made nominally all year.

this is why the metric you use is so incomplete.

until you can grasp the difference between inflation and wage buying power (which, by the way, in NOT keeping up with inflation) you're never going to understand this issue.

 
At 3/17/2012 11:34 AM, Blogger morganovich said...

juandos-

i think high priest was making fun of benji, not agreeing with him.

 
At 3/17/2012 11:55 AM, Blogger juandos said...

"For example, when the cans of albacore tuna go on sale, e.g. from $2 to $1, I increase my purchases from zero cans to 10 or 20 cans (and do the same thing when they go on sale again in a few weeks or months)"...

Well damn! PT except for the cost of milk which actually has droped 40 cent a gallon since the beginning of the year everything else here in the St. Louis area has gone up...

I know the guy who has the nearby Family Dollar store and he told me that since January the prices he has to charge just to break even have gone up 13% and its mostly due to the increased costs of transportation...

There is one other notable decrease in price and that's the products of the local swilleries, Anheuser-Busch and Schlafly beers...

"For example, when the cans of albacore tuna go on sale, e.g. from $2 to $1, I increase my purchases from zero cans to 10 or 20 cans (and do the same thing when they go on sale again in a few weeks or months)"...

Sure wish that would happen around here right about now...:-(

 
At 3/17/2012 11:57 AM, Blogger juandos said...

"i think high priest was making fun of benji, not agreeing with him"...

Ahhh, well that's good news then morganovich...

 
At 3/17/2012 12:04 PM, Blogger juandos said...

Hey PT I meant to ask you something, have you been over by Bluffdale to see that NSA monstrosity being built?

 
At 3/17/2012 2:22 PM, Blogger PeakTrader said...

VangelV and Morganovich, you've been shown about a hundred different ways why you're wrong, including in the context of economic models.

You've responded by pounding those square pegs into round holes even harder.

Why repeat myself?

Juandos, do you really expect me to believe there are hardly any discounts or sales in the St Louis area?

 
At 3/17/2012 4:31 PM, Blogger Ron H. said...

Peak: "Juandos, do you really expect me to believe there are hardly any discounts or sales in the St Louis area?"

I think most people look for sales and discounts on items they buy regularly, and buy more when the price is lower. But, if that's true, it can't explain why you're not experiencing inflation while others are.

Are you just a much better shopper than everyone else, or is your market basket unique in some way?

 
At 3/17/2012 10:07 PM, Blogger PeakTrader said...

Ron, if you're talking about food inflation, prices go up and down, not just up, although prices on some items went up and didn't go down.

A few recent food purchases are:

Milk $3.50 (same price as 2008)
Large Hass Avocados $1 each (on sale)
Four large green tip Del Monte bananas $0.81 (on sale)
Vitamin water $1 each (on sale)
Prime rib roast $6.50 lb (four pounds, not on sale)
10 lbs potatoes $3 (not on sale)

There were many items on sale I didn't buy.

Bread prices went up (instead of buying Oroweat bread, I buy top quality bread from the deli, because they're now about the same price).

 
At 3/18/2012 10:38 AM, Blogger morganovich said...

peak-

funny, i can't seem to remember even one.

you one the other hand, like to play this silly game of pretending you have proven things and then jumping back and forth to individual numbers and aggregates as it suits you.

food at home was the single biggest inflationary item in CPI other than energy.

yet you trot out one (alleged) personal experience and seek to try to claim CPI is wrong while ignoring it's egregious weightings around rent and healthcare and claiming it's right.

this is why you are not taken seriously.

i just bough a prime rib last week to make dinner for friends. feeding 4 cost me $96 just for the meat (3 bone in ribs, about 6.5 pounds).

if you think that isn't up from a few years ago, then you are living in a fantasy world. the price of pretty much every food commodity has been soaring for several years.

it's obvious in commodity prices and the aggregates.

it amazes me that you try to pass off using <50% of proper weighting in rent and healthcare as "the cpi knows what it's doing" and then ignore the huge 4.5% jump in food at home costs by pointing to some purported personal experience.

that's completely inconsistent.

 
At 3/18/2012 11:29 AM, Blogger PeakTrader said...

Morganovich, let's take your most recent "very simple example" to prove whey you're wrong (again).

You say: "you earn $100k. you have $1 million in savings...prices rise 10%. you wages rise 15%. thus, you buying power is up on a wage/price ration...but you still lost big...the value of your savings dropped by 100k in real terms, almost more than you made nominally all year."

Perhaps, you can explain why anyone would buy bonds, and how anyone can sell bonds, when interest rates are below inflation?

Also, you say:

"i just bough a prime rib last week to make dinner for friends. feeding 4 cost me $96 just for the meat (3 bone in ribs, about 6.5 pounds)."

You paid about $15 a lb for your prime rib roast, while I paid $6.50 a lb in California (at Safeway)!

I'll sell you prime rib roasts for $14 a lb and pay for the shipping.

 
At 3/18/2012 11:53 AM, Blogger PeakTrader said...

Moreover, you say:

"tips are pegged to CPI. few looking for inflation protection view them as useful as that tends to be the crowd who, like me, feel that CPI deeply understates inflation."

Annual returns for US Treasury Inflation Protected Securities as measured by Barclays Capital US Treasury Inflation Protected Index

2011 13.56%
2010 6.31%
2009 11.41%
2008 -2.35%
2007 11.63%
2006 0.41%
2005 2.84%
2004 8.46%
2003 2.60%
2002 16.57%
2001 7.89%

 
At 3/18/2012 1:11 PM, Blogger Ron H. said...

Peak: "A few recent food purchases are:

Milk $3.50 (same price as 2008)
Large Hass Avocados $1 each (on sale)
Four large green tip Del Monte bananas $0.81 (on sale)
Vitamin water $1 each (on sale)
Prime rib roast $6.50 lb (four pounds, not on sale)
10 lbs potatoes $3 (not on sale)
"

LOL

What is this? Why do I care what you buy at the store? Are these prices up, or down, or what? What about the other 300 million of us? What did our grocery bills look like? I know mine was higher.

 
At 3/18/2012 1:30 PM, Blogger PeakTrader said...

Ron says: "Why do I care what you buy at the store?...What did our grocery bills look like? I know mine was higher."

Well, mine wasn't higher.

 
At 3/18/2012 2:48 PM, Blogger Ron H. said...

Peak: "Perhaps, you can explain why anyone would buy bonds, and how anyone can sell bonds, when interest rates are below inflation?"

Who said anything about bonds? Do you really not understand morganovich's point? The interest rate is irrelevant for the purpose of that example. The dollar equivalent value of your $1 million *principle* has decreased by 10% - nearly the amount you earned that year.

As to why anyone would buy bonds is not something we need to consider here, but one reason might be that they consider bonds the only safe investment in the world, and preserving as much principle as possible might be their only goal.

Retaining 1/2 the value of bonds is preferable to none of the value of an asset that is completely destroyed.

 
At 3/18/2012 6:01 PM, Blogger PeakTrader said...

Ron, the point Morganovich made was 10% inflation eroded the principal by $100,000.

However, in reality, inflation is low. When someone buys a bond with a 2% interest rate and inflation is 3%, then the investor has inflation expectations below 2%.

 
At 3/18/2012 8:04 PM, Blogger morganovich said...

peak-

wow. that post on returns to tips demonstrates such a lack of financial sophistication i am literally stunned.

that's the returns to the bonds

econ 101 midterm, Q1:

as rates go down, what happens to bond prices?

you are mistaking capital appreciation for coupon.

and TIPS are indexed to CPI. it's how their principal payments are determined. i suggest you educate yourself:

http://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

if tips yields are dropping, that is NOT a sign that inflation expectations are dropping, it's a sign of buying, which is a bet ON inflation.

if TIPS yields were negative, that would be a sign that people were willing to PAY to get inflation protection.

i don;t know what you claim to trade, but it sure can't be bonds. i have TA'd freshman econ students who have a better grasp of this that you do. by end of semester, ALL of them did.

this question:

"Perhaps, you can explain why anyone would buy bonds, and how anyone can sell bonds, when interest rates are below inflation?"

just proves it again.

first off, perhaps you've noticed that the big bond buyers have been the fed and foreign central banks that are not buying based on return.

next, you get the big banks shoring up tier one capital. they use what is called "leverage". perhaps you've heard of it. at 15:1 gearing (and higher) you can get a lot of yield from even 50bp of coupon. (of course, you are left in great danger when rates rise and you suffer huge capital losses. watch for this as a major issue in a couple years)

third, you have lots of unsophisticated folks that just have an asset allocation strategy that's formulaic.

and finally, you have speculators, looking for capital appreciation, though hell if i know why anyone would make that bet today.

this should be painfully obvious to any "trader"...

i have no idea what you think that shows about the value loss on your savings.

you seem unable to grasp some really simple concepts here.

then, you make the "inflation is low" argument you have never been able to support again.

it seem like your only tactic here is to repeatedly duck the issues, run away when cornered with facts (like food prices) and then claim victory over and over as some sort of grandstanding.

i note you never answer the questions about the 70's. was inflation then high? because the underlying prices in the CPI basket are moving the same way they did then.

you are just deluded and claiming that your old pants fit because you set your scale back 20 pounds.

 
At 3/18/2012 8:31 PM, Blogger Ron H. said...

Peak: "Ron, the point Morganovich made was 10% inflation eroded the principal by $100,000."

Yes - inflation is bad for savers. You said his example was wrong, then went on about bonds.

I give up.

 
At 3/18/2012 8:34 PM, Blogger morganovich said...

besides, if you want to use some real numbers, it doesn't get any better.

real wage growth was negative.

inflation was way above the 1 year risk free rate and way above the S+P performance.

so you (if you are an average american) lost on both your savings and on your income.

it didn't happen to me and may not have happened to you, but that is not the typical experience.

PS.

the more i think about your bond example as an inflation gauge, the more obviously ridiculous it becomes.

real rates are strongly negative.

twist and zirp baby.

can you seriously be trying to argue that the 1 year bonds 20bp yield is an inflation expectaion?

NO ONE except maybe you thinks inflation is that low. not even the most outlandish boskin crony would make such a claim.

it's market manipulation, not expectations.

 
At 3/18/2012 8:49 PM, Blogger PeakTrader said...

Morganovich, I see when you're faced with reality, you make things up.

I'm glad you finally noticed capital appreciation, and now realize TIPS outperformed inflation by a huge margin.

So, are you saying there aren't any bond investors who benefit from disinflation or deflation?

Anyway, I can't respond to the statements you think I made, because I didn't make them.

However, yes, there was much higher inflation in the 1970s, and also much higher interest rates.

 
At 3/19/2012 9:24 AM, Blogger morganovich said...

peak-

that last comment was just babble.

you are not even making sense anymore.

you point to capital appreciation in TIPS (a sign of aggressive buying) and try to use that to demonstrate a LACK of inflation expectation?

what color is the sky on your world?

and your comment (and attempted straw man) about bond investors and disinflation is just foolish.

bond investors do BEST during deflation. but if you think they are betting on that now, you have your head deeply in the sand.

then why all the tips buying?

the bond market is too manipulated right now to draw any legitimate signals from, and what's more, you know it and are just willfully lying because you have no other way to make your inaccurate case.

so, as predicted, you shovel out a contradictory mess of ideas and declare victory while ducking all the key questions.

why don't you come back when you have any actual arguments to make.

i note you are once more silent on the 70's.

 
At 3/19/2012 7:41 PM, Blogger PeakTrader said...

Morganovich, I think, you like to create statements I didn't make just to tell me I'm wrong.

I've explained the many contradictions in your statements before.

Nonetheless, as you say: "funny, i can't seem to remember even one."

 

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